For Hawai‘i’s luxury homeowners, underinsurance can be financially disastrous. It occurs when a policy fails to provide the right amount of coverage for certain events or the wrong type of coverage to align the payout with the real-world cost of repairing or replacing high-value items. For high-net-worth individuals and those with custom homes, this can lead to significant out-of-pocket expenses, delays in repairs, and delayed or cancelled claims without Property Claim Services or PCS insurance.
Closing these coverage gaps is necessary for high-value craftsmanship and materials to be repaired or replaced at their full value after a covered event.
This article aims to help luxury homeowners in Hawai‘i identify the common pitfalls that lead to underinsurance, and answers some of the most commonly asked questions.
What is Underinsurance?
Underinsurance refers to when coverage limits fall short of the real-world replacement or repair costs for covered assets. For example, even if a custom fixture costs $10,000 to fully replace, underinsured homeowners may only receive a partial settlement equal to its current value, including depreciation. Th PCS insurance index may determine how high-value property losses are valued in these cases.
The risks of underinsurance are more serious for custom-built and luxury homes since the value of fixtures and architecture is more likely to exceed the limits of standard policies. Homeowners of luxury properties commonly pay out of pocket to fully repair or replace luxury constructions due to inaccuracies or oversights in their coverage.
Common Pitfalls Leading to Underinsurance
Here are seven common factors that luxury homeowners in Hawai‘i should monitor to make sure they have sufficient coverage for their properties:
1. Outdated Replacement Cost Estimates
Underinsurance can result from outdated replacement cost estimates. How can this happen? The owner of a luxury home may rebuild part of the house with new architecture or premium materials, increasing the cost of repairing or replacing these parts if they get damaged.
Forgetting to update the replacement costs on their home insurance policy means that the insurer may only pay to replace the old construction as assessed at the time the policy was bought. In some cases, coverage may be denied completely.
This is not the only way that replacement costs can become outdated. Due to inflation and labor shortages, a repair or replacement job may become more expensive than it was when the policy was purchased. This further widens the gap between the costs the insurer will pay and the practical cost of replacing the damaged architecture in 2025 or later.
2. Overreliance on Market Value
This is a related but distinct pitfall that many homeowners fall into where they base their insurance liability calculations on market value rather than replacement value. In the case of a luxury property, consider its appraised sale price. If a home is worth $700,000 on the market, many homeowners believe that $700,000 worth of insurance will be enough.
The problem is that many luxury homes, especially those with custom architecture and fixtures, can cost much more than their appraised sale price to rebuild. By the time a disaster strikes, material and labor costs alone could be double what they used to be.
To avoid this pitfall, homeowners should get updated appraisals for their home that account for custom architecture. Separate riders may be needed to cover fixtures or constructions after they are appraised individually for real-world replacement costs. PCS insurance metrics should be reviewed to make accurate loss calculations.
3. Inadequate Coverage for Custom Features, Detached Structures, or Improvements
Luxury homeowners often add value to their properties in the form of amenities, many of which will not be adequately covered by conventional insurance. Standard policies may cover unique materials, imported finishes, or heritage craftsmanship with a broad industry valuation that does not cover the real-world replacement cost of those items.
Even adding a smart home system to the property, such as security, temperature control, or entertainment, may be an underinsured asset if the traditional homeowners insurance policy fails to recognize its value.
This includes separate structures, which may be added to the home after the last insurance valuation. Pools, outdoor kitchens, guesthouses, garages, cabanas, seawalls, boat docks, and even custom landscaping may be underinsured by a conventional policy. High-value home insurance reassesses the value of these structures and adds the riders or endorsements needed to cover them against common perils.
4. Incorrect or Omitted Property Schedules
Even if the home has adequate insurance, high-value items on the property, such as art, antiques, jewelry, or wine, may be underinsured. Broad personal property limits may not cover the actual value of collectibles, which need to be individually appraised and scheduled separately and may not account for increases or decreases in the collections.
5. Limited Loss of Use of Additional Living Expenses (ALE) Coverage
In Hawai‘i’s rental market, extended alternate housing can be expensive. When work is being done, such as repairs due to a covered peril, the people living in the house may need to temporarily rent elsewhere. Conventional policies often restrict the amount of additional living expenses that are covered or the duration that this coverage lasts.
6. Ignoring Natural Disaster-Specific Coverage
Hawai‘i can subject luxury properties to many natural disasters, including floods, wind storms, and earthquakes. Despite their prevalence, many homeowners have insurance policies that only cover basic wind and rain damage, excluding damage caused by named storms and other events. Something called a “named-storm deductible,” which reduces coverage limits for named hurricanes and tropical storms, can cause unexpected losses without additional riders.
Best Practices to Avoid Underinsurance
Luxury homeowners can follow these steps to avoid underinsurance on their properties:
- Schedule a full home appraisal, and update the valuation every 2-3 years, including rebuild estimates
- Work with a private client insurance specialist, preferably one who is familiar with coastal and luxury properties in Hawai‘i
- Schedule valuable items individually with itemized riders
- Confirm coverage for all structures, including landscaping and hardscaping
- Review policy limits annually, adjusting for inflation, renovations, additions, and inventory
- Understand natural disaster clauses related to flood, hurricane, and earthquake protection, making sure each is specifically included
These steps should help luxury homeowners understand underinsurance in Hawai‘i. However, a local insurance specialist is the best resource that luxury property owners have to recognize and update their insurance needs to match their homes.
Frequently Asked Questions
Does home insurance cover the full value of my luxury home?
Not always. Many standard policies are capped based on outdated rebuilding costs, which may not account for luxury constructions.
How do I know if I’m underinsured?
Professional appraisals and rebuild cost estimates can confirm if your current policy limits are adequate.
Will renovations affect my insurance needs?
Yes. Any structural or amenity upgrades can increase the property’s replacement costs.
Is flood or hurricane damage covered automatically in Hawai‘i?
No. Hurricane and flood damage usually require separate endorsements or individual policies.
What is “Extended Replacement Cost Coverage” and should I have it?
This allows the coverage limit to increase beyond the policy’s cap to account for increases in rebuilding costs that may not be predictable. Luxury property owners in Hawai‘i should have extended replacement cost coverage to futureproof their insurance against high-cost changes in labor and inflation.
Apply for PCS Insurance to Protect Your Property
For luxury homeowners, underinsurance is more than a technical liability. It is a potentially disastrous financial risk that could undermine their future and expose them to unnecessary liabilities. At Atlas Insurance, our experienced team of local insurance experts is committed to customizing and regularly updating high-value home pcs insurance policies to make sure you never lack valuable coverage for a covered event.
Atlas Insurance has been covering local communities for nearly a century and understands the local and regional impacts our clients are facing.
Contact our team today to learn how to avoid underinsurance on your luxury properties in Hawai‘i.